Editor / Futu Information Zoe
Abstract: according to a research report released by CITIC, Semiconductor Manufacturing International Corporation is the largest fab factory in China and the fourth largest in the world. Under the background of capacity shortage in the industry, the mature production capacity of the company continues to be fully loaded.
The bank has long been optimistic that the company will continue to expand production on a large scale with higher capital expenditure, and continue to carry out advanced technology research and development, and believes that the company has the ability to surpass international second-tier manufacturers to replace the core target for chip manufacturing.
The company's current valuation is the lowest among Chinese mainland and Taiwan wafer foundry companies, and a US license is expected to catalyse a rebound in valuations and maintain a "buy" rating with a target price of HK $38.70.
Semiconductor Manufacturing International Corporation's short-term operation is normal after being included in the entity list, and we believe that overseas suppliers are more likely to obtain a supply license issued by the US Department of Commerce for the company's 10nm and above process in the near future.
$Semiconductor Manufacturing International Corporation (00981.HK) $It was included in the physical list by the United States on December 18, 2020. If the supply of equipment, materials and parts using American technology is interrupted, you need to apply for corresponding permission, and the company has more than 6 months' inventory of raw materials. The statutory review cycle of the permit is 60 days. Assuming the application is made at the end of December, we infer that the company may know the results one after another in the near future. We believe that the reasons why Semiconductor Manufacturing International Corporation has a high probability of obtaining a process license above 10nm include:
1) the U.S. Department of Commerce mainly restricts items related to 10nm and the following processes (including EUV extreme Ultraviolet Lithography), and the review standards for other parts are lenient.
2) as an important customer, Semiconductor Manufacturing International Corporation is easy to get the support of American suppliers (such as Applied Materials Inc, Pan Lin, etc.)
3) Semiconductor Manufacturing International Corporation has a high proportion of American customers, with a 2020Q4 of 27.7%. He is an important supplier to customers such as Qualcomm Inc and Broadcom Ltd, and the industrial chain is interdependent and difficult to replace. If the company obtains a license, it means that the operation is sustainable and production expansion is expected to be carried out normally, which will catalyze the rebound in valuation.
Advanced process is blocked, Semiconductor Manufacturing International Corporation strategy may turn to mature process, Beijing new factory (SMIC Capital) the first plant is expected to quickly put into production in 2022, with domestic design companies to grow.
The company's previous expansion of advanced processes has actually reduced profitability, mature processes have a higher return on investment and are expected to improve ROE levels in the long run.
According to EIA data, Semiconductor Manufacturing International Corporation plans to build at least 200000 wafers per month in Beijing in the next 10 years. The first P1 plant in Beijing (SMIC Capital) is expected to start production in 2022, and the P2 plant is expected to start production in 2025. The new factory in Beijing (SMIC Capital) will focus on the 12-inch mature process, which will be based on 14nm~65nm, focusing on six platforms: logic, Internet of things, storage, image sensor, high voltage display and power management.
Unlike the main designers of advanced process chips in the market are overseas leading companies (such as Qualcomm Inc, Apple Inc, NVIDIA Corp, AMD, MediaTek, Sailings, etc.), mature processes have many domestic design companies growing rapidly. For example, Weir shares in image sensor field (the main process is 55~65nm), Zhaoyi innovation in memory field (55~65nm), purple light sharpening in Internet of things chip field (28~40nm), Ruixin micro in logic chip field (14~40nm), etc. The company is expected to grow with domestic high-quality design companies and share domestic alternative dividends.
Market expectations are low, valuations are significantly lower than their peers, and ROE is expected to improve in the future.
Due to the negative factors previously included in the entity list and the exclusion of some indices, the company's valuation has fallen back to around 1.6 x PB in 2021, which is lower than that of Hong Kong stocks.$Hua Hong Semiconductor (01347.HK) $(3.1x PB 2021), comparable companies$United Microelectronics Corp (UMC.US) $(2.9x PB in 2021), etc., are the lowest valued companies among Chinese mainland and Taiwan wafer foundry listed companies.
With reference to United Microelectronics Corp's performance after withdrawing from the advanced process, Semiconductor Manufacturing International Corporation's ROE performance is expected to improve in the future. During the period from 2013 to 2019, United Microelectronics Corp's ROE basically fluctuated around 5%. Due to the active withdrawal of investment in the advanced process below 12nm in 2018, the depreciation of the corresponding equipment has been completed one after another, and the market estimates that United Microelectronics Corp's ROE is expected to rise from 11% to about 16% in 2020-2022. We believe that Semiconductor Manufacturing International Corporation has certain similarities with United Microelectronics Corp in terms of income scale, technical ability and profitability, and is expected to achieve a similar ROE promotion process in the future after focusing on the mature process.
The revenue guidance given by the company in the fourth quarter earnings statement for 2021 is only medium to high single-digit growth, which we believe is also a more conservative guidance based on the principle of prudence. Taking into account the continuing shortage of production capacity in the industry, the company also benefits from the boom in the industry, wafer prices are expected to continue to rise, if the license is landed, production expansion is expected to be carried out smoothly, we believe that the annual performance is expected to exceed the guidance.
Risk factors:
Downward market demand; uncertainty of international environment and license acquisition; R & D and mass production of new technologies are lower than expected.
Earnings forecasts, valuations and ratings:
We expect the company to continue to benefit from domestic substitution and maintain prosperity downstream, with a positive trend in 2021, and we expect gross profit margin to decline year-on-year in 2021, followed by a gradual recovery. Taking into account the above situation, the future government project funds are expected to continue, we maintain the company's 2021-2023 net profit forecast to 487 million / 553 million / 728 million US dollars, corresponding to 2021-2023 EPS forecast of 0.48 pounds 0.55max 0.72 Hong Kong dollars, net assets per share 15.48 pounds 15.99 pounds 16.66 Hong Kong dollars, with reference to comparable companies Hua Hong Semiconductor, United Microelectronics Corp valuation level and appropriate discount, according to 2021 2.5 times PB Give the target price HK $38.70 and maintain the "buy" rating.
As of press time, Semiconductor Manufacturing International Corporation rose 4.19 per cent to HK $26.1, with 48.3 per cent upside from Citic's target price of HK $38.7, with a total market capitalization of HK $206.093 billion.
